Saturday, 11 April 2015

The long and complicated story of the pipeline that was … and then wasn’t … and now might be.

April 10, 2015

Pakistan
has been trying for a while now to build buzz regarding Chinese
President Xi Jinping’s scheduled visit to the country — a visit that was
originally scheduled to take place last fall during Xi’s broader tour
of South Asia, but was postponed due to nationwide protests in Pakistan.
It’s still unknown precisely when Xi is meant to arrive in
Islamabad. China is keeping a tight lid on the specifics. Earlier
reports suggested a visit this week, but that hasn’t panned out. Current
expectations are for something in mid- to late-April. Despite all the
ambiguity surrounding the visit itself, Pakistani sources have
reportedly blown the lid on one of the big deliverables: China will fund
a long-stalled pipeline that would connect Iran and Pakistan, supplying
natural gas from the former to the latter.

A report yesterday in the Wall Street Journal outlined
the terms of the expected deal, based on comments from Pakistani
officials. During Xi’s visit, China and Pakistan will sign an agreement
on a Chinese loan for Pakistan to make good on its 485-mile section of
the so-called “Peace Pipeline.” Pakistan’s part of the project is
estimated to cost around $2 billion. Islamabad is reportedly in the
process of negotiating a deal with China Petroleum Pipeline Bureau, a
subsidiary body under China’s massive state-owned China National
Petroleum Corporation (CNPC) to build part of the pipeline.
If all proceeds according to plan, natural gas from Iran’s South Pars
field — the largest natural gas field in the world — could be flowing
through a completed pipeline as soon as late 2017. Iran claims that it
has completed its 560-mile portion of the pipeline, which runs from the
coastal city of Asaluyeh on the Persian Gulf to the southern Balochistan
border between Pakistan and Iran. On the other side of that border, the
pipeline will make contact with the Pakistani port city of Gwadar — a
locus of Chinese investment in Pakistan. The WSJ‘s report outlines the terms in more detail:

The cost would be $1.5 billion to $1.8 billion for the
pipeline, or $2 billion if an optional Liquefied Natural Gas terminal
at Gwadar is included in the scheme. Under the deal, 85% of the
financing will be provided by a Chinese loan, with Pakistan coming up
with the rest.The remaining 50 miles (80 kilometers), from Gwadar to the Iranian
border, will be built by Pakistan. The pipeline, which would take two
years to build, would eventually supply Pakistan with enough gas to fuel
4,500 megawatts of electricity generation—almost as much as the
country’s entire current electricity shortfall.

It’s worth noting that that the Iran-Pakistan border in Balochistan has grown increasingly unstable; the WSJ‘s report of China funding the pipeline came within 48 hours of reports that Pakistan-based Sunni militants affiliated with Jaish-ul-Adl had ambushed and killed eight Iranian border guards in Iran’s Sistan-Baluchestan province.
The announcement came shortly after an Iranian diplomatic delegation,
led by Foreign Minister Javad Zarif, arrived in Pakistan for a major
bilateral meeting. As my colleague Shannon noted earlier
this week, China is wasting no time in preparing for expanded economic
relations with an Iran unencumbered by international sanctions related
to its nuclear weapons program. After the announcement of a framework
for a comprehensive agreement between the P5+1 group of powers and Iran
in Lausanne, Switzerland on April 2, China is exploring every avenue of
cooperation with Tehran. Although the meeting between Iranian
representatives and their Chinese counterparts focused primarily on
future investments and oil exports, it is likely that Beijing broached
the issue of the Iran-Pakistan natural gas pipeline.

This pipeline has, to put it mildly, had its ups and downs over its
short but storied history. Color me skeptical of the two year time line
presented by Pakistani officials; Pakistan may have better luck holding
out for Godot’s arrival than the first drops of Iranian oil via this
joint pipeline. However, if China does come out big and deliver after
Xi’s departure from Islamabad, the pipeline will be an important coup
for energy-starved Pakistan.
Initial negotiations for a pipeline connecting Iran’s South Pars gas
fields to Pakistan date back to the mid-1990s. Iran and Pakistan signed a
preliminary agreement in 1995, and after that, the project fell onto
the back-burner. In early 2013, Mahmoud Ahmadinejad and Asif Ali
Zardari, the men preceding the current leadership in Tehran and
Islamabad respectively, inaugurated the final construction phase of the pipeline after agreeing to jointly construct the Pakistani side of the project.

Back in December 2013, the pipeline’s fortunes temporarily appeared
bright, only to be shot down by Iran’s lack of patience for Pakistan. In
a move designed to put some pressure on the United States, which was
naturally against the pipeline, Pakistan indicated that it would “accelerate” the project. The announcement came shortly after former U.S. Defense Secretary Chuck Hagel visited Islamabad.
Iran had announced that should Pakistan fail to meet a winter 2014
deadline for the pipeline, it would face a fine of $1 million a day
until it met its obligations.

A few days after Pakistan’s announcement, Iran fired back, expressing its frustration at Pakistan’s efforts: Tehran canceled a major loan to
Pakistan that would have allowed it to theoretically complete the gas
pipeline project under a mutually understood road map. Iran made the
move after Pakistan’s Minister for Petroleum and Natural Resources
Shahid Khaqan Abbasi attributed the Pakistani gridlock on the project to
international sanctions on Iran. Abbasi had remarked that ”it was
unlikely to move ahead until sanctions on Iran are lifted.” Following
the cancellation, Iran suggested that Pakistan looked to “third parties”
for financial assistance, originally suggesting European companies as a
source of possible financing for Islamabad (the United States and Saudi
Arabia, two of Pakistan’s traditional allies, did not offer assistance
given Iran’s position as the counter-party in the project).
Beyond the financial and infrastructure issues inhibiting the
completion of the pipeline, independent analysts suspect that the
pricing structure that Iran is offering Pakistan for natural gas access
via the pipeline is actually disadvantageous to Islamabad and skewed in
Tehran’s favor. As I wrote in 2013,
“Iran is importing gas at the price of $4/MMBtu [million British
Thermal Units] from Turkmenistan, a price which is uncorrelated with
prevailing global prices for oil. In its exports to Pakistan, Iran has
pegged the price at $14/MMBtu — a price that is periodically revisited
and updated in line with market conditions.” A report by the Sustainable Policy Development Institute described
the financial implications of the pipeline as a “death sentence for
Pakistan’s economy,” adding that it was “unfortunate on behalf of
Pakistan who has blatantly ignored the energy dynamics and its pricing
while going for this deal.” Adding to Tehran’s advantage, the rate at
which it imports natural gas from Turkmenistan was reported as 250
percent below the price at which it will sell gas to Pakistan.
For China, making this pipeline happen will add to the geopolitical
heft of its New Silk Road initiative, which opts to increase
infrastructure connectivity between eastern and western Asia. The
Pakistani section of the pipeline will intersect Gwadar where China
maintains an important presence. If China is looking for alternative,
non-sea-based routes to extract Iranian natural gas, it could integrate its Karakoram highway corridor with Gwadar, bringing Iranian natural gas to China without the use of vulnerable sea lanes.

Additionally, in the broader geopolitical tussle between the United
States and China, the Iran-Pakistan pipeline’s eventual completion will
be a net negative for Washington. Leaving aside the issue of nuclear
sanctions against Iran, which may well be lifted in the event of a
comprehensive nuclear deal this summer, the U.S. has encouraged Pakistan
to fulfill its energy needs from Tajikistan, via Afghanistan’s Wakhan
Corridor. Pakistan ignored the U.S. proposal and moved ahead with the
Iranian option, underlining Islamabad’s interest in the project.

After years of gridlock and failed planning, it appears that China’s checkbook is the sorely needed deus ex machina for
this pipeline. Geopolitically, Iran, Pakistan, and China all see major
benefits in the successful conclusion of this project. The problems have
always come down to the nuts-and-bolts of finance and capacity,
primarily on the Pakistan. With China’s proven record of successfully
spearheading infrastructure projects abroad, this should be less of a
concern. Still, don’t hold your breath for this pipeline just yet.